Investment Advice for Doctors: First, Do No Harm

They take eight or so years off from the world to do nothing but learn how to be doctors, then receive a six-figure annual paycheck with no real idea of what to do with it.

RON LIEBER

Nobody’s perfect, but some types of people are much less perfect with their money than others.

One group of individuals who make more financial mistakes than average may not have much in common with another. But we can learn a lot about what not to do by rubbernecking at each of them in turn.

So over the next couple of weeks, I’ll be sifting through the mistakes of various classes of people in search of particular human frailties, acute messes of the well-meaning, and sins of action or inaction.

We begin with physicians, for whom a combination of factors can conspire against success. They take eight or so years off from the world to do nothing but learn how to be doctors, then receive a six-figure annual paycheck with no real idea of what to do with it. If they can save lives, many believe, managing money ought to be easy. But self-certainty like that can lead to all sorts of horrible mistakes.

Ben Utley, a financial planner in Eugene, Ore., whose clients are almost all physicians, says he doesn’t believe that doctors necessarily make more mistakes than the public at large. But if they make three or four times as much money as the average person, their mistakes are going to be much more noticeable.

“They may have an extra $50,000 annually on an after-tax basis,” he said. “If there is no financial plan, that money tends to wander off.”

Here’s how that ends up happening.

IMPATIENCE The life of a physician-in-training is one mostly of deprivation. After years of debt, apprenticeship and little sleep, it’s no surprise that doctors want to reward themselves when the first big paycheck arrives.

Meanwhile, real estate agents are standing by to speak sweet nothings into their ears, cooing about the trophy house that ought to serve as a marker of their newfound professional standing.

Mr. Utley has a name for the malady that results. He calls it “Residentia,” a disease marked by out-of-control impulses to buy a home two or three times the size of the average American’s, no matter how much medical school debt the doctor may have.

There’s one big problem with giving in, according to Joe Hollen, an emergency room physician turned financial planner in Reno, Nev. Doctors have a shorter working life than many people because they generally start no earlier than age 30 or so. They earn a lot, but they also pay more in taxes, receive little to no financial aid for their children’s educations and have fewer years for their retirement money to compound.

That makes it all the more important for them to put more money away sooner and not hand too much of it over to mortgage bankers or make other big financial blunders.

FAITH There are all sorts of opportunities for big earners to err financially, and the nature and professional standing of doctors make them particularly vulnerable.

“Doctors are used to a tremendous exchange of information on a very open level,” said Steve Podnos, a cardiac physician turned financial planner in Merritt Island, Fla. “There is no guile, no trickery. Everyone works together in a medical setting to get a good outcome.”

But in the world of financial services? Not so much. “Physicians are viewed as marks, because they are known to have money,” he said.

Barry Kaplan, a former dentist who is now a financial planner in Atlanta, says physicians and dentists can find themselves being pitched on questionable investment schemes. He recalls seeing the same company at every dental convention offering an opportunity to make tax-advantaged donations to one’s own charitable foundation and then use the money for things like college expenses.

“I kept saying to myself, ‘This can’t possibly be legal. Haven’t they found them out by now?’ ” he recalled. “Two plastic surgeons told me that everyone in their office was looking at it. I thought they were out of their minds.”

Eventually, the dentist behind the scheme was found guilty of tax fraud for filing false returns.

CONFIDENCE Hubris is perhaps the most common wealth destroyer here. “The problem is that they think they know better, that there is some secret formula to beat the market, and there’s not,” said Carolyn McClanahan, a financial planner in Jacksonville, Fla., and a former emergency room physician. “I used to think that way too.”

Overconfidence is not unique to doctors, but given that they are already well above average in terms of raw intelligence and income, it can be all too tempting for them to think they can size up investments as quickly as they take a patient through triage.

So they are tempted by all sorts of wacko pursuits. Mr. Podnos recalls a $25,000 marijuana farm investment that one physician client reported with a straight face, arguing that the returns were going to be 18 percent annually. Mr. Kaplan remembers a pitch to invest in rubber shoes for horses. “Apparently, all the guys in the doctor’s lounge were talking about it,” he said.

Even financial planners with the seal of approval from the American Medical Association offer up eyebrow-raising advice. In the “A.M.A. Physicians’ Guide to Financial Planning,” published in 2008, the author, Paul H. Sutherland, encourages people to run away from advisers who want them to invest in index funds — even though the managers of such funds think it’s pure folly to try to outperform various stock and bond benchmarks.

“Market bottoms are knowable,” Mr. Sutherland writes. Later he adds that “ideally, you should own 70 to 150 investments, each of which is so compelling that you cannot stand not to own it.”

In 2006 he started four of his own “Utopia” mutual funds, and in August 2008, he told the trade publication Investment News that “this is the time to be buying, especially global companies, because there are stocks all over the world that are down 50 percent right now.” But within the next six months or so, stocks fell about 40 percent more before the rebound began. All four funds suffered enormous losses that year. (Mr. Sutherland later closed all four funds — he says a state tax issue was the reason — and the remaining money was returned to the account holders.)

This bottom-calling stuff turns out to be kind of hard, no? When I asked Mr. Sutherland, who is a financial planner, about all of this, he pointed to the performance of his clients’ portfolios for the decade ending June 30. It includes all of the money that was in the Utopia Funds, yet the returns still range from 6.16 percent annually on average to 8.02 percent. Pretty respectable given the last 10 years’ tumult.

“If you believe that excellence exists, that talent exists, then go find it,” he said. “There are managers out there that you can find that have performed.”

This is true, but there’s also no reliable way for a physician — or anyone — to distinguish between people who have been lucky and people who are truly skilled in a sustainable way. When I asked the American Medical Association whether it stood behind Mr. Sutherland’s advice, a spokeswoman offered me a statement from Robert Musacchio, senior vice president of A.M.A. business products and services: “While the American Medical Association does not endorse investment strategies, we do attempt to meet physicians’ need for specialized information by seeking out qualified experts based on a rigorous review of their experience and background.”

Mr. Kaplan, who first pointed me to Mr. Sutherland’s writings, says that he sees no reason for doctors to shoot for the moon.

“There is a high barrier to entry in the medical field and a low failure rate,” he said. “All they have to do is systematically put 20 percent or more of what they make in nice, dull investments, and they’re set for life. Why kill themselves to hit grand slams when they’ve already won the game?”

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